What’s Up With Our Reserve Study?

BY ROBERT W. BROWNING, PCAM, RS

More and more these days the above phrase emanates from boards, finance committees and property owners. New disclosures, more frequent reserve studies, escalating replacement expenses, inadequate reserve funds, and rising reserve study fees are perking the interests of all involved. Political, mortgage, and indemnity concerns are also eyeing reserve studies with increasing interest. So, what is up with our reserve study and what the heck is going on here?

Recent reserve study news has been largely overshadowed by such intriguing topics as election procedures, anti-foreclosure laws, and assessment collection procedures. During this time, however, much has emerged directly impacting both reserve studies and reserve funding.

In 2004, the California Association of Realtors sponsored AB 2718 (Laird). This bill which took effect on July 1, 2005 establishes an annual reserve fund disclosure statement. Fundamentally the bill requires a new disclosure statement be distributed to all members with the annual budget packet. This disclosure statement known as the California Assessment and Reserve Funding Disclosure Summary addresses six basic questions that must be answered by the board of directors. These questions relate to the association’s current monthly assessment; is there a special assessment needed or planned for in the future; will projected reserve fund balances be sufficient for the next 30 years; what are the current reserve study balances and liabilities; what components in the study are not funded. Since an entire chapter is needed to explain the answers to those questions, that discussion is not included here. Consult your reserve specialist for additional information.

In order to maintain AB 2718 compliance, association boards must generate a NEW disclosure statement annually. While most attorneys and reserve specialists agree that the board can delegate this duty to the reserve specialist, the disclosure statement’s contents and distribution responsibilities fall squarely on the association’s board of directors.

As per a practical necessity (lawyers say so), the disclosure statement must be generated from a CURRENT reserve study. The requisite study must be current, but it need not be a full study with site visit. While the three year full study requirement remains, an update study is sufficient to generate the disclosure statement in the intervening two years. Prior to enacting this new legislation, I would have advised clients that they didn’t need to formally update their reserve study every year, if under a competent review the association was on track and their last reserve study remained relevant. Those days, unfortunately, have passed.

Not only has yearly update discretion passed, but so to have historically low replacement costs passed. Fuel, Iraq, Katrina, emerging markets and the California insurance crisis have all conspired to rapidly drive up replacement expenses. Asphalt sealing costs, for example, were generally a nickel per square foot when I started doing reserve studies in 1991 and remained there for more than a decade, but around 2003 sealing prices suddenly doubled to a dime. Lumber has followed a similar route due to hurricanes and offshore demand.

These abrupt expense increases are enormously challenging particularly for associations with major component replacements due in the next five years. Since inflation is typically factored into reserve studies utilizing the Consumer Price Index tool, the recent sudden cost upsurge has yielded a significant negative reserve fund impact for many associations.

Contractor insurance is also impacting replacement expenses. Contractors hired by common interest developments (CID) are now required to carry a CID insurance rider that has ratcheted up contractor costs, and in some trades there is a scarcity of CID insured contractors. In the Sacramento yellow pages there are 196 roofing contractors, but if you live in a CID, your choice may only be 10 to 15 because of a widespread lack of insurance coverage and CID expertise. Competitive bidding is hampered in this quasi monopolistic environment leaving precious few contractors with lots of work.

In this difficult environment, expert consultants and engineers are supreme allies in the war on overwhelming expenses. Associations are realizing tremendous value by hiring the appropriate experts when contracting large or complex reserve projects. It is no longer appropriate for managers or board members to take a roofing project, for example, out to bid. The ever expanding and frequently changing array of replacement choices demands specialized skills. There are select managers up to the task, but theirs and all managers’ expertise is best exploited in other ways like hiring and managing the experts.

As associations employ experts more often, associations will gradually reap long term benefits. Roofing, painting, paving, landscaping and other major components will survive longer and perform better. Even though these benefits are obvious, most associations do not reserve for these services. A small front end investment will ultimately decrease repair and replacement burdens.

Project experts, material and labor’s high costs, and escalating insurance demands are all shaping the modern reserve study. Recent legislation imposing a yearly reserve study and disclosure statement is probably a prudent advancement during this undecided period.

Think you’ve had enough? Wait… the Realtors have introduced a new reserve bill in 2006! More on that in a future issue.

Robert Browning is a two time past President of the California North Chapter of CAI, past Chair of the CA Legislation Action Committee and is currently on the Board of Trustees for CAI and Vice-President for CAI’s Foundation for Community Association Research. He holds the RS and PCAM designations from CAI and is a CA licensed general contractor. He can be reached at Bob@BrowningRG.com. This article may be reproduced with permission of the Browning Reserve Group. Does your association need an article for their newsletter? Maybe we can help. Give us a call at (877) 708-0600 Toll Free.

Published in the Voice a publication of Community Associations Institute – California North Chapter. Volume 7, Issue 2, Spring ’06.

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